Here is some general information regarding buying a home. You might want to pour a cup of coffee before beginning to read. It is a bit long, but, buying a home takes a little more input that suggesting which big screen t.v. you want to put in the family room.
We find it most useful to go through the process in general terms. Each buyer is an individual and the general can be tailored to specifics.
You want to buy a home.
We won’t attempt to list all the reasons that lead people to this decision. From a purely economic standpoint, in the long run, it is better to own than to rent. When purchasing property, payments made against principal increase the equity you have in a home. Despite the recent downturn, home values today are greater than they were 5 years ago. This fact holds true over the last 70 years.
When do you want to buy?
It may be that you are not quite sure. You may need more information to formulate a time line. This note should help clear up any mystery about the process. Hopefully, it will answer most of your questions. If any questions remain, we will be glad to make sure they are answered.
The most important step is for you to determine how much home you are comfortable paying for on a monthly basis. You will see ads on television and hear ads on the radio extolling the virtues of different lenders. You will see many different advertisements on the internet offering to pre-approve you for a loan quickly from the comfort of you computer. You probably would not make any other major life decision sitting in front of a computer. We think you should only deal with a lender that is local.
You have seen what happened to people that chased “bargain” rates on the internet. They usually found the real rate was higher and they had no access to anyone. This is a very personal decision and computers are rather impersonal objects.
We recommend that a buyer contact a local bank or mortgage company. It is much easier to deal with a firm that offers you a face to face meeting to discuss the process of obtaining a mortgage. Remember, just because a firm pre-approves you for a loan, you are not obligated to use them to purchase the home. You can change your mind about a lender right up to a few days before closing. If you have applied for a loan and the lender has done an appraisal, the appraisal can usually be purchased by the new lender.
There is no cost to being pre-approved. If a firm requires some sort of payment, refuse to do business with them.
Being pre-approved by more than one lender will not affect your credit rating one iota. The credit scoring systems treat multiple inquiries for mortgages as one inquiry. No one will penalize you for attempting to acquire the best mortgage for your situation.
When you speak to a lender, they will need you to reveal a great deal of our personal financial information. They need this information to satisfy their underwriters which in turn are under the “microscope” of institutions that will subsequently buy the loan from the lender. Our recent credit meltdown has caused all mortgage companies to document all information regarding loan applicants.
When you speak with a lender, you must keep in mind that your goal is to ascertain how much home you can buy and keep payments in a comfortable range. I would strongly urge you to only look at fixed rate loans that do not include provisions for rate changes in the future. There are situations in which adjustable rate mortgages make sense, but it is usually best for a first time home buyer to focus on a loan that will offer a consistent payment.
Depending on the amount of money that you have set aside for a down payment, you can either qualify for what is called a conventional loan (this is a loan in which you usually put down at least 20%) or you can qualify for an FHA loan (these loans require as little as 3.5% down). A qualified lender will be able to go over both types of loans and see which one fits your individual situation. You can get a conventional loan with less than 20% down, but this will create a need for private mortgage insurance (PMI), which will increase your monthly payment.
Once a loan amount and interest rate is determined, you ask the lender for a good faith estimate. It will clearly outline what has been promised. I will share that the good faith estimate is not carved in stone. The newest version of the good faith estimate will not even include your monthly payment. Some lenders will try to avoid giving you a good faith estimate.
They will offer a “worksheet” which will have your monthly payment. It is not binding. Demand a good faith estimate and a worksheet.
In our fluctuating market, interest rates are on what seems like an hourly roller coaster ride. Rates can and do change quickly. It is important for you to understand that the rates usually do not change a great deal over a short period of time. Today, they are close to 4% but they may shoot up before you finish reading this note. The actual rate you receive will be determined once you find the property you wish to purchase.
Once you have a contract ratified, you can ask your lender to lock your rate and you will not be affected by any rate changes that occur between contract ratification and closing.
Phew…….it sounds daunting to just get through that process, but in reality it may only take a 15-20 minute phone call to give the information to the lender and then maybe another 30 minutes to discuss your options. We are always available to digest what our clients have been told and answer any questions that exist. If necessary, we often speak with the lender to make sure our client is hearing what is actually being shared.
Once you know how much you have to spend, you can decide what you wish to buy. The amount of money available will impact whether you can buy a condo, a town home or a detached single family home. Condo’s are at the lower price end of the scale and single family homes are at the top. In our current market, all styles are are available.
As you have heard, location is a major factor. The closer a home is to the center of activity (in this area Washington, DC) the higher the prices are for homes. As you move out into the suburbs, prices are lower. In the suburbs, again the proximity to a Metro will impact the pricing.
Understanding that price is a factor, we think it is important to stay focused on the fact that you’re are buying a home. You need to make sure that regardless of location, the home you find has the amenities that will make it a home for you.
Location is usually defined as a place.
Once you live in a location, you will realize that the distance of your commute is a major factor. You will realize that your access to shopping, public transportation and recreational facilities is also an important part of location. You need to spend a little down time with yourself and examine your lifestyle and make sure all aspects of location are part of your decision making process regarding where you new home is located.
We can go over the various options and areas with you. It will be easier for us to perform our magic if we have a complete understanding of what is important to you. The right home is out there. With the proper information, we can find it and it can be yours. Patience!
Now, you probably have read and heard the term “short sale” and or “foreclosure” or even “bank owned”. These terms have spent a fair amount of time in the news over the last few years. They represent different situations.
“Short sale” generally is referring to a property that is owned by someone that cannot pay their mortgage anymore. Some of these people financed the home with exotic financing. Some of these people took advantage of rising home values and took out equity lines that they can no longer pay. Others have fallen on hard times and can no longer pay. The reasons are many but the end result is the same, the property owner owes more than the house is worth and the property owner is no longer paying their mortgage. They call the bank and they are told that they need to try to sell the home. They call a Realtor and have the home listed for a price that the Realtor thinks will get an offer. Once the offer is received, it is signed by the property owner and forwarded to the lender with an elaborate “short sale ” package.
Before the bank will even consider the offer, they must receive all the documents. Once they have all the documents, they forward the offer and package to an internal department that will review the offer and accept the offer or make a counter offer. This process can take weeks with some lenders. There is no guarantee that the price the home was listed for is the price that the bank will accept for the home. They have internal reviews that determine how much they will lose on the sale and what they may potentially lose through foreclosure. Decisions are not based on facts apparent to the public.
If the sale falls through, the property does not become a “pre-approved short sale”. Some agents re-list the home with this term or a similar term. It is not true. Any new offer has to start at square one and the prior approval is not part of the equation.
Many times deals are turned down because of the lenders financial position at the time of the offer.
“Foreclosures” or auctions are really very difficult to purchase comfortably. Homes that are being auctioned often can only be viewed from the outside. Auctions are usually held on the courthouse steps. Participants must have a cashiers check to submit and if a bid is won and they must promise to get financing within a short period of time. Many homes that are auctioned off, do not appraise for the value and a loan is not available. The cash deposit is lost. It is a very costly gambit into the unknown. It is much better to wait and look at bank owned properties.
“Bank owned” properties have been foreclosed on by the lender. The bank has title to the property. They are sold “as-is”. They can be viewed like any other home for sale. The bank has determined what they need from the property so you know that the list price is close to what they expect. We have represented many clients that have purchased bank owned properties. We have no problem dealing with the banks. These sales are very similar to the sales that occur between homeowners and buyers outside the “short sale” dynamics.
Once you have a comfort level regarding the process, you should choose a real estate agent.
This is another important decision. Your agent has to become your confidant. You have to share your dreams and your weaknesses. You have to trust this person to protect your interests above all others during the transaction. I think you have to believe that your agent is responsive to your needs.
In the state of Maryland and in the District of Columbia, agents have to be licensed. Most reasonable people agree,It takes more than a license to perform a service properly. Experience garnered over time and transactions adds an immeasurable understanding to lessons taught in classrooms. Once you are comfortable with an agent, you should work with that agent exclusively. The agent will work under a contract.
If an agent says that they do not need a contract, understand that they legally can not represent you completely (They are forbidden from offering advice or assisting you with preparation of an offer or negotiating on your behalf).
An agent that shows you homes without a contract, may be presumed to represent you, but without a contract they must represent the interests of the seller of each home you are shown. (They are legally bound to protect the interest of the seller as a sub-agent of the listing agent.) Making sure that your agent has a contract with you protects you throughout the process.
We hope this long article covers most of the basics regarding buying a home. If you would like to sit down and go over the process, we would be glad to set aside a time that is mutually convenient for both of us. We can meet and we can answer any questions you have face to face.
My name is John MacArthur and my partner is Lourdes Tudela. For more information, fill out the form below.